Why is Russia jeopardizing the Ukrainian grain deal?

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Given Ukraine’s successful counterattack, the fighting is not going Russia’s way. The gas supply situation in Europe is also not as bleak as Russian propaganda claims. Under these circumstances, Putin finds that he does not have as many means of pressure on the West at his disposal. Threatening to torpedo the grain deal is one of the few options he has left.

Less than two months after a deal was finally struck to restart crucial grain exports from Ukraine’s Black Sea ports, Russian leaders are threatening to pull out of the deal on the dubious grounds that the grain is not not sent where it was supposed to be.

Moscow’s withdrawal from the deal would deprive Ukraine of much of its hard currency earnings and drive up global food prices and inflation in Europe. Russia’s losses, on the other hand, are expected to be insignificant. The country has already lost its status as a reliable partner in the eyes of most countries, while any reduction in hard currency earnings from grain sales would be inconsequential given the huge trade surplus it is currently running in due to soaring energy prices.

The benefits to Moscow from signing the grain deal have always been modest. It is likely that Russian President Vladimir Putin simply wanted to have an additional means of pressure on the West. From his point of view, the time has come to exercise this power. Tellingly, the Russian president’s threats to pull out of the deal coincided with the Ukrainian military’s successful counterattack in the Kharkiv region and with reports of decent gas storage levels in Europe.

Putin said the grain deal was being considered by Moscow because Ukrainian grain is not being shipped to the Middle East and Africa, where it is most needed, but to Europe. At the time of his complaint, 108 ships had left Ukrainian ports, with 47% of the grain going to Turkey and Asian countries, 17% to Africa and 36% to the EU. In any case, as Putin himself acknowledged in the same comments, neither of the two documents signed by Russia to allow the export of Ukrainian grain specified a destination, belying the Kremlin’s apparent concern over the food situation. in the poorest countries of the world.

Currently, the drought in southern Europe means that Ukrainian cereals are in high demand on the world market. Shortly after the signing of the agreement, grain exports from Ukraine were almost back to their pre-war rate. In September, Kyiv is expected to export about 4 million tons, according to Andriy Sizov, head of the SovEcon analysis center: not so far behind the 6 to 7 million tons it exported before the war, and much more than the 1 to 1.5 million tons that he managed to export before the signing of the agreement.

For Ukraine, the deal is not just a source of much-needed hard currency (the country’s GDP is expected to fall 35-40% this year). It’s also a chance to make room for this year’s harvest, which is expected to exceed 53 million tonnes of grains and 15 million tonnes of oilseeds: far more than Ukraine’s domestic needs.

Russia’s grain exports, meanwhile, fell 22% in July and August to 6.3 million tonnes. Although food supplies are exempt from Western sanctions in the interest of tackling food insecurity, bankers and insurers are reluctant to do business with Russia, while shipping companies are reluctant to risk sending their ships in a conflict zone. Many jurisdictions have closed their ports to vessels linked to Russia, according to industry figures.

Other factors making Russian grain less competitive on the world market are too strong a rouble, export tariffs and a record harvest (about 95 million tons of wheat), which has to be stored somewhere: for the first times for a long time, Russia is facing a lack of storage space. The country is unlikely to record revenues comparable to last year, when it made $11.5 billion from grain exports.

The fertilizer market is not doing much better. Potash fertilizer production fell by a quarter in the first seven months of the year, while their main producer, Russia’s Uralkali, is experiencing logistical and transactional problems. The drop in production is mainly the result of a 25-30% reduction in exports.

Technically, the company is not subject to sanctions, since the US Treasury issued a general license in March exempting agricultural products, including the production, transport and sale of fertilizers. But nearly a third of Uralkali’s exports have passed through Baltic ports, which now refuse to work with Russian companies. Asian buyers, on the other hand, are ready to buy more Russian fertilizers, but only at a significant discount.

Ultimately, the lack of formal bans on working with Russian agricultural companies and fertilizer producers matters little at a time when the entire Russian economy has become toxic. Banks are either slow to process transactions or categorically refuse to work with Russian companies. Foreign buyers are trying to find alternatives to Russian suppliers, and companies from the United States and Canada are quickly filling these new niches.

Even if Ukrainian cereals and fertilizers disappear from the market, there is no guarantee that they can be replaced by Russian ones. Western companies and their customers are willing to incur additional costs in order to avoid working with Russian companies, especially while the war in Ukraine continues.

Either way, Russia’s threat to pull out of the grain deal is already having an effect. In recent days, Putin has received phone calls from French President Emmanuel Macron, German Chancellor Olaf Scholz and UN Secretary General Antonio Guterres. The grain issue is also expected to be discussed in bilateral meetings at the UN General Assembly in New York starting September 20.

If the agreement fails, it will not only be a blow for Ukraine, but also for the EU. It will lead to higher wheat prices, which will inevitably translate into inflation levels, which are already at an all-time high in the Eurozone: 9.1% year-on-year in August. Food prices are the second driver of European inflation after energy prices.

Right now, given Ukraine’s successful counterattack, the fighting is not going Russia’s way. The gas supply situation in Europe is also not as bleak as Russian propaganda claims: the continent’s underground storage facilities are almost full, despite Moscow having shut down the Nord Stream gas pipeline, and although prices are high, European governments are willing to pay to end their dependence on Russia once and for all. In these circumstances, Putin, who is used to dialogue from a position of strength, finds that he does not have at his disposal as many means of pressure on the West. Threatening to torpedo the grain deal is one of the few options he has left.

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